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Detailed Glossary
Detailed Glossary
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Quark spread | ||
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Underlier | ||
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Something physical or tangible that may be referenced by a contract or trade Detail Financial derivatives are completely cash-based and usually have no physical underliers Energy derivatives usually have at least one physical underlier, which may be a commodity, e.g. coal or a something related to a commodity e.g. storage The underlier acts as a bridge to the physical world - and usually as a set of reference prices for price-setting and valuation We need to emphasize that nearly all energy trades have at least one physical underlier - few of them actually involve the delivery of energy commodities
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Terminal | ||
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Usually used in the context of Natural Gas - an entry or exit point into a regional gas network or National Transmission System Detail In the UK natural gas is mostly extracted from gas fields in the North and Irish Seas and pumped through an offshore network of pipelines to a series of Terminals At the Terminals the gas is metered and then enters the National Transmission System LNG may be discharged from LNG vessels in an LNG plant, and then regasified into a Terminal located in or close to the port Interconnectors connect to Terminals at both ends, allowing gas to be flowed out of, and into, the NTS The UK Terminals are mostly located on or near to the coastline, and are therefore sometimes collectively referred to as the "Beach", or individually as Beach Terminals | ||
Exchange for Physical | ||
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Convert an Exchange Futures position to a physical position either with an OTC counterparty, or with the Exchange itself Detail Classic Futures contracts are settled physically: if you are long 2,000 pork bellies for delivery in May 2018 then, when the contract expires, the Exchange will arrange for one or more parties that are short those pork bellies to make delivery to you at the location, time and price specified in the Futures contract we don't usually call this Exchange for Physical, since it is the contracted outcome of the Futures contract. The Exchange usually just calls this "Delivery", it is is also known as "Take to Physical" or "Cascade to physical" Other Futures contracts do not necessarily contractually go physical, or you may want to exchange your regular Futures position for physical before the expiry date, or under different terms in these cases you may contact the exchange and request an Exchange for Physical - the Exchange will attempt to match you up with another party who wishes to take their opposite position to physical alternatively you may arrange off the Exchange to Exchange for Physical with another party, and then both contact the Exchange to notify them In general, Exchange for Physical is an expensive process, it is usually simpler to close out the Futures position on the Exchange and open an equivalent OTC position on a broker platform
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LNG | ||
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Liquefied Natural Gas Natural Gas is difficult to liquefy by compression alone, it is usually liquefied, stored and transported at very low temperature LNG acts like oil and coal for transportation, like natural gas once it is returned to its gaseous form Detail Unlike propane gas it is not practical to liquefy natural gas (which is mostly methane gas) by compression alone, and it is normally liquefied by refrigeration to -160 oC and stored and transported at moderate pressures LNG needs to be transported in specialist ships (LNG vessels) that can maintain the low temperature required, so are quite different to other commodity carriers On arrival at a destination port the LNG needs to be returned to its gaseous state in a plant which is attached to a gas terminal Other than the ships themselves the logistics of LNG transport involve the same complexities as oil and coal LNG is big business for two main reasons: A vast quantity of natural gas is already available from oil rich countries - but there are no pipelines to flow it long distances (Russian gas into Europe being the main exception) The process of extracting natural gas from unconventional sources (typically shale) by hydraulic fracturing ("fracking") is likely to yield even more gas - but usually not where it's needed
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Arbitrage | ||
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The difference in cost of achieving the same outcome through different means Detail This is easiest explained as an example: To buy a particular new car in the UK costs £27,000 The identical UK-spec car costs £22,000 in Belgium It will cost you about £1,000 to have it shipped to the UK, plus another £1,000 costs for delivery, any inspections, your time to manage all this etc. Cost of buying the car in the UK = £27,000 Total cost of buying the car in Belgium and having it delivered to your home = £24,000 There is an arbitrage opportunity of £3,000 In general, in a liquid market, with minimal market constraints, traders will exploit any arbitrage, and the arbitrage values should all tend to zero In our example if everyone chose to buy the car in Belgium: the price would probably go up in Belgium because of the higher demand the cost of shipping might go up (because of demand and the realization it's valuable) the price of the car in the UK would probably fall (because they weren't selling any) When the market acts to reduce arbitrage to insignificant values then we describe this as arbitrage-free Arbitrage-free is a powerful method in many valuation tools: it implies we can value an Instrument or trade by looking at alternative ways of achieving the same outcome For example the value of an oil forward contract in six months time, should not be significantly different to the spot price of oil, plus all of the costs of storing that oil for six months | ||
Virtual | ||
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Something that behaves like something else but is not really that thing Detail We've all heard of virtual reality - it appears (or tries to appear) real but is not, but it does have many of the characteristics of real So what does that mean for us? Well let's take a real(!) example Virtual Storage - Storage allows organizations to inject gas at one point in time and withdraw it later An organization (the seller) may sell another organization (the buyer) virtual storage the buyer of the product sells gas at no cost to the seller at some point later in time the buyer of the product requests the seller of the product to sell the gas back at no cost the seller tracks the level of virtual gas, and tracks this against the virtual capacity of the storage product sold | ||
Novation | ||
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A generic legal term for transferring existing contracts from one legal entity to another Detail A legal entity may agree with another legal entity to transfer all, or a subset of, its contracts to another legal entity Each company that the original legal entity has contracts is notified, and a novation is agreed: that is our organization agrees to novate our contracts from the first legal entity to to the other on a particular, mutually agreed, date amongst the contracts novated will be any long term contracts, master agreements and any trades Trade novation has to be reflected in our ETRMs, and the following convention is usually followed:
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Scheduling | ||
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Often used as a term for the Operational activities involved in gas and power Detail Short term position needs to be nominated or notified to the respective system and market operators:
This set of activities is often collectively referred to as Scheduling The schedule of a trade describes the delivery profile (that will need to be nominated) | ||
Line Loss | ||
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When transmitting Electricity via Interconnector, some of the power is lost and thats called Line Loss. For UK-FR interconnector line loss factor is 1.17% | ||